Mortgages: knowing when to walk away
In January 2011 Jak and I made a bold and controversial financial decision that would send our lives down a sharply different path. We decided to default on our mortgages.
For background, you should read my earlier post about buying our current house in 2006, around a year before the Seattle housing market peaked and began dropping.
By January 2011, the numbers were much worse:
- Weâ€™d spent $179k on regular mortgage payments
- Weâ€™d paid approximately $18k additional against principal on our second loan
- Weâ€™d spent about $51k on house repairs and remodeling
Total cost to date: $248k
Amount still owed on our two original mortgages: $363k
Value of house (Zillow estimate): $316k
So after putting nearly a quarter of a million dollars into this house, we were still $47k underwater on the loans.
And still sinking.
As of January 2011, it had been a little over two years since Iâ€™d lost my last full-time job, and another had not been forthcoming. Iâ€™d tried to bootstrap a software company, but had lost both my partners to economic necesssity. Iâ€™d gotten a little freelance work, but nothing long-term or steady.
Meanwhile, Jak had been employed more often than not, but with fluctuating wages and occasional months between contracts.
For the last 27 months, our income averaged roughly half what it had been when we bought the house. For those 27 months, our mortgage payments ate 65% of our after-tax income, or 56% of our gross income.
If you look at those numbers and think, â€˜Hey, wouldnâ€™t they qualify for that federal Making Home Affordable program?â€™ then yes, you would be correct.
The MHA program was supposed to help distressed homeowners stay in their homes by lowering interest rates and reducing monthly payments. Anyone who had bought a house before 2009, who was in financial hardship (including unemployment), and whose mortgage payment exceeded 31% of their monthly gross income was supposed to be eligible. But despite it being a government-created program, execution was voluntary and left entirely in the hands of the big-bank servicers. In our case, this meant Bank of America.
I spent a couple of weeks in 2009 putting together the considerable paperwork to apply. After a few months of radio silence, I started calling Bank of America. I spent hours upon hours on hold and being shuffled from person to person, each of whom told me something different. After months of trying to get someone to move us forward, we finally received a notice by mail that they didnâ€™t have current paperwork (um, maybe because youâ€™ve sat on it for a solid year?!?) and therefore our application was denied.
Swallowing my frustration, I started the application all over again. And once again, we got nowhere.
The problem appears to be that the monetary incentive the government offers servicers pales in comparison to the fee payments those servicers get from the actual mortgage holders once a loan goes into default.
Bank of America didnâ€™t want to modify our loans; they wanted us to default. Because they make more money that way.
I was starting to feel like the worldâ€™s biggest sucker.
I had been unemployed for most of the last two years, but I had not been idle. Among other things, I was on a rampant self-education crusade.
I had realized that, like most Americans, we had been making major life decisions based on information and advice that was simplistic at best and fallacious at worst. You know, pearls of wisdom like â€˜mortgage debt is good debtâ€™.
Looking at the state of our jobs, investments, and housing in early 2009, it was clear weâ€™d paid an enormous price. I was determined that I would never be so naive again.
So I started studying. I devoured several nonfiction books a week, most weeks. (Let me say once again how much I love my public library.) Many of them were on economics and economic history. I learned — and am still learning — a lot of truly surprising things.
Eventually I had done enough research on the origin of the real estate bubble and the nature of the crash to have developed a sort of slow bitter rage at the financial industry. The unfettered greed of a relatively small number of people had devastated millions of lives.
On a more personal front, it was clear that the banks had no incentive to make any changes that would help us at all. â€˜Squeeze until thereâ€™s nothing left, then toss â€™em away and move on to the next poor suckerâ€™ seemed to be the plan.
Although our emergency fund — once as high as $40,000 — was sorely depleted, it was not yet completely empty. The problem was that some major house repairs were overdue, and the only way we could pay for them was to drain what savings we had left.
In January 2011 I sat down with a spreadsheet and ran some complicated projections. I came to the sickening conclusion that even if the real estate market improved much faster than the data suggested it would, by the time our youngest graduated high school in six years we would still be deeply underwater on the house.
Weâ€™d be 52 and 47 years old, stuck in a totally inappropriate house that we didnâ€™t want, unable to sell or move. Weâ€™d have almost nothing in savings, because weâ€™d been using our retirement money to make payments on the house. Weâ€™d have 19 years left on one crippling mortgage and — worse — the balloon payment on our 15-year second mortgage would be just four years away.
And that was the optimistic path, assuming that at least one of us could remain fully employed at all times and that we didnâ€™t incur any major unforeseen expenses. Having spent the last of our emergency savings just to keep the house from falling apart, weâ€™d be one calamity away from total bankruptcy.
Even then, if I had believed that we were in a â€˜typical recessionâ€™ — a couple of tight years followed by an employment resurgence — we might have just kept on as we were, hoping that things would get better before we sank completely. But the more historical perspective I achieved, the more convinced I became that something fundamental had broken, and that our national economy would never again be the same.
Itâ€™s difficult to conceive that all twenty-plus years of my personal economic experience — from the time as a teenager that I first started paying vague attention to the outside world, through my entire adult life to date — might be part of a bizarre thirty-year aberration. But everything Iâ€™ve learned about macroeconomics and history suggests exactly that.
I no longer believed we — as a nation, or as individuals — would ever be â€˜bouncing backâ€™ to the way things were pre-2008.
So, after two and a quarter years of holding it together on half our original income, we stopped paying our mortgages.
I know a lot of people struggle with the ethics of mortgage default. Itâ€™s been considered a Very Bad Thing in our culture for longer than most people have been alive.
And itâ€™s something that just a few years earlier I could not have imagined doing. If weâ€™d been generally inclined to run up a bunch of debt and walk away from it, we would have taken the bankruptcy option on our forty thousand dollars of credit card debt back in 2005. Instead we sucked it up, made the necessary sacrifices, and paid it all off.
But by January 2011, I had an entirely different perspective. First of all, this wasnâ€™t just going to handicap us for a few years; this was going to cripple us for decades at least, and probably the rest of our lives. We had done absolutely nothing to deserve that fate.
Second, although weâ€™d played by the rules, the banks had not even pretended to act in good faith. Corporations do not operate under a moral code, and will relentlessly pursue maximum profit at the expense of individuals who do.
No one was going to look out for us … except us.
And the idea that corporations are allowed to act exclusively in their own self-interest, but individuals who do the same are morally reprehensible? Just doesnâ€™t hold water.
Before we missed that first payment in February 2011, I spent perhaps a hundred hours researching every aspect of mortgage default. I double- and triple-checked every legality to make sure that this would in fact be our best financial path, and could not leave us in an even worse situation.
Itâ€™s not entirely without risk. But then, neither was the path we were on.
Over a year later, my economic expectations are still proving accurate. Zillowâ€™s estimate of our property value has dropped another $35k in the last 13 months. Unemployment figures are still high, and our personal job situation hasnâ€™t improved.
More than ever, I believe weâ€™re doing the right thing.
In future posts, I intend to detail my research into the legal and practical aspects of mortgage default. Iâ€™ll talk about the emotional repercussions, and the way that rethinking this one basic concept has led us to make even more radical, but positive, changes in our lives. Iâ€™ll talk about our experiences over the last year of default, and — when we get there — describe the process of foreclosure.
In the meantime, if you have questions, Iâ€™d love to hear them.